Whether you’re going to take out a loan, rent a house, or get a job associated with finances, your credit score may either help you or get you off track. People often think that their credit scores are not a big deal. The truth is that your rating can sometimes be more important than you used to think. Here’s a short guide on a credit score with useful tips on how to improve it.
Understanding of a Credit Score
A credit score is a numeric expression of how you can manage your finances. It covers various spheres of your financial life, including your bill payment history, your monthly loan payments, how much debt you owe, and what forms of debt you have. A credit score is a three-digit value that commonly ranges between 300 and 850. Your credit score is determined by each of three major credit bureaus: Equifax, TransUnion, and Experian. Each credit bureau has its own definition of good and bad credit. Let’s take a look at the table below:
| Credit Type | Equifax | TransUnion | Experian |
| Very Poor | – | 300-600 | – |
| Poor | 300-579 | 601-660 | 300-579 |
| Fair | 580-669 | 661-720 | 580-669 |
| Good | 670-739 | 721-780 | 670-739 |
| Very Good | 740-799 | – | 740-799 |
| Excellent | 800-850 | 781-850 | 800-850 |
Your credit score consists of several elements, such as:
- Payment history. When you make your loan payments on time, a lender reports it to one or several credit bureaus. This also applies to your bill payments. By paying timely, you can maintain good credit or boost it if it’s already low;
- Credit utilization. This ratio shows how much revolving credit you use compared to the total credit available to you. Keeping your credit utilization ratio low shows that you’re good at managing your finances and is not addicted to loans;
- Length of credit history. When your credit history is long, it’s easier for a lender to analyze your credit profile and estimate your creditworthiness. Borrowers with strong and long credit histories are considered reliable;
- Credit mix. By having various forms of debt, you can show a creditor that you can successfully manage different loans;
- New credit. When you open too many new credit accounts rapidly, lenders may think your financial situation is unstable. Thus, they will lend you money cautiously and on worse terms.
Summing up, your credit score is a value that demonstrates your creditworthiness. It consists of five major elements. By knowing what factors can affect your credit score, you can pay more attention to your financial behavior and build strong credit over some time.
What Is a Starting Credit Score?
When you don’t have credit, it means that your credit profile doesn’t exist. But when you take out your first student loan or get your first credit card, it marks the start of your credit history. But your credit score never starts at 0. The lowest credit score you can have is 300. First-time borrowers may either build good credit just by making several on-time payments or make their brand-new credit suffer by paying late.
Why Is Your Credit Score Important?
Your credit score can affect your life significantly. When you have good credit, it will be easier for you to become a homeowner, rent a house, or get a new job or public assistance. You can also count on getting favorable terms when it comes to personal loans or credit cards. On the contrary, bad credit can make it challenging for you to get a loan or get good insurance rates.
What’s the Average Credit Score?
According to the Experian study for 2022, the average FICO score value in the US is 714, which is considered good. But it’s not true that an average American has a good credit score. Nearly 35% of consumers have a “subprime” credit score, which is between 580 and 619, with approximately 16% of Americans having bad credit.
Ways to Improve Your Credit
When you know what factors affect your credit score, it becomes easier to determine certain steps you should take to improve it. Here are some of them.
Keep Track of Your Credit Reports
You’re allowed to make one free check per year from each of the three bureaus. You need to review them carefully to ensure they contain accurate information. Keep in mind that your credit reports can look different as some lenders report your payments only to one credit bureau. At the same time, some lenders may check only one of your three credit reports when they make loan decisions, while mortgage lenders are more likely to check all three.
Always Pay on Schedule
Whether it’s a loan or your utility bills, you should avoid late or missed payments. A lender or utility company reports both your on-time and late payments to credit bureaus. While paying on schedule boosts your credit, delays make it go down. Therefore, you should prioritize on-time payments to maintain or build good credit.
Aim for a Low Credit Card Balance
Try to maintain a ratio between used credit and total available debt as low as possible. This way, you will demonstrate good credit utilization.
Leave Your Credit Accounts Open
Closing your accounts may result in reducing the length of your credit history and affect your credit mix. Thus, even if you have some unused credit cards, don’t rush to close them. It’s better to keep them open unless they are those with high annual fees.
Try Not to Apply for New Loans Frequently
Many applications within a short time frame can indicate that your financial situation is challenging. Additionally, each application involves a credit check, which lowers your credit score by a few points. Therefore, you need to be cautious with new applications that are reported to credit bureaus.